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Another strong quarter

Margin expands 34bp QoQ; contingent provision prudently scaled up

* ICICI Bank (ICICIBC) reported another strong quarter with in-line earnings (RoA of 2.2%) despite making contingent provisions of INR15b and INR11.96b toward NPAs due to strict provisioning norms. Core PPoP grew 32% YoY, while NIMs expanded by 34bp QoQ to 4.65%.

* The asset quality performance was exemplary as the GNPA/NNPA ratios and PCR improved further. The bank now has a total contingency buffer of INR115b.

* Business growth was strong and broad-based across Retail and Corporate segments. The bank continued to invest in tech and digital initiatives to further boost growth momentum.

* With a floating-rate book of 70%, we think the bank is well placed to ride the rising interest rate environment. We estimate ICICIBC to deliver RoA/RoE of 2.2%/17.0% in FY25. Maintain Buy.

Business growth robust; PCR improves further to ~83%

* ICICIBC’s 3QFY23 PAT grew 34% YoY (in line) to INR83.1b, aided by healthy NII growth and controlled opex, even as the bank continued to create contingent provisions (INR15b) and strengthen provisioning norms, which resulted in additional provisions of INR11.96b. The bank, thus, reported 3QFY23 annualized RoA and RoE of 2.2% and 17.6%, respectively. For 9MFY23, PAT grew 40% YoY to INR227.7b.

* NII grew 35% YoY (6% beat), aided by 34bp QoQ expansion in margins to 4.65% and healthy loan growth of 20% YoY. For 9MFY23, NII grew 28% YoY to INR444.6b. Other income was flat at INR50.2b, with treasury gains of INR360m. Fee income remained modest and grew 4% YoY.

* Opex rose 16% YoY, resulting in a healthy 31% YoY growth in PPoP to INR132.7b (8% beat). Core PPOP grew 32% YoY.

* On the business front, advances grew 20% YoY/4% QoQ, led by 21%/23% YoY growth in Domestic/Retail loans. Growth was driven by home loans, credit cards and personal loans. The SME book grew 38% YoY, while the corporate book too reported a healthy pick-up and grew 15% YoY (+3% QoQ).

* On the liability front, deposits grew 10% YoY (+3% QoQ), while CASA deposits saw 6% YoY growth (flat QoQ). The average CASA mix declined 40bp QoQ to 44.6% (period-end CASA ratio at 45.3%).

* Fresh slippages increased to INR57.2b (2.8% annualized). However, higher recoveries restricted the increase in net slippages to INR11.2b. The GNPA/NNPA ratios improved 12bp/6bp QoQ to 3.1%/0.6%, while PCR improved to ~83%. The restructuring book moderated to INR49.9b (0.5% of loans). The bank created additional contingent provisions of INR15b, taking the contingency buffer to INR115b (1.2% of loans).

Highlights from the management commentary

* Loan growth is likely to remain healthy, with Retail, SME and Business Banking to be the key growth drivers. Capex activity has picked up in the private sector, while the government sector is already doing well.

* The cost of funds is likely to increase at a faster pace from 4QFY23/1QFY24 onward.

* About 45% loans are linked to repo, 21% to MCLR, 4% to other EBLR and 30% are fixed rate in nature.

* Tech expenses were ~9.3% of total opex in 9MFY23 vs 8.6% in FY22.

Valuation and view

ICICIBC reported a strong performance in 3QFY23, driven by healthy NII/Core PPoP growth and controlled provisions (despite creation of contingent and additional NPA provisions) underpinned by pristine asset quality. The stable mix of a high-yielding portfolio (Retail/Business Banking) and a low-cost liability franchise is driving steady NII growth, resulting in margin expansion to 4.65%. The bank is seeing a strong recovery across segments, while asset quality trends remain steady with industrybest PCR at ~83%. The additional Covid-related provision buffer (1.2% of loans) provides further comfort. We estimate ICICBC to deliver RoA/RoE of 2.2%/17.0% in FY25. Reiterate Buy with our SoTP-based TP of INR1,150 (2.8x Sep’24E ABV).

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